European Parliament Analysis: The Role of the Reverse Charge Mechanism in Tackling VAT Fraud

1. VAT Fraud as a Systemic Threat

Value added tax (VAT) is central to EU public finances, generating over €1.2 trillion annually and representing ~16% of the EU budget. Persistent VAT fraud continues to cause tens of billions in losses each year, including €12.5–32.8 billion attributable to missing trader intra‑Community (MTIC) fraud—one of the most damaging forms. MTIC fraud is often linked to organised crime, cross‑border networks, and money‑laundering activities.

2. How MTIC Fraud Works

MTIC fraud exploits the VAT exemption on intra‑Community supplies. Goods are bought VAT‑free in one Member State and resold domestically with VAT charged, after which the trader disappears without remitting the tax. Fraud networks often use buffer companies to obscure the chain, high‑value mobile goods (e.g., phones, laptops), and circular trading loops known as carousel fraud. The complexity and speed of these schemes challenge tax authorities’ detection capabilities.

3. The Reverse Charge Mechanism

The reverse charge mechanism shifts VAT liability from the supplier (standard rule) to the customer. This prevents the supplier from charging VAT and disappearing with the proceeds.

• Applicable only in B2B transactions.
• Requires invoices to include the wording “reverse charge.”
• Designed as a targeted anti‑fraud tool, particularly against MTIC schemes.

Articles 199a and 199b (VAT Directive)

• Article 199a (Sector‑based reverse charge): Allows Member States to apply the reverse charge in predefined high‑risk sectors such as emission allowances, mobile phones, integrated circuits, energy supplies, metals, cereals, and telecom services. Initially temporary, it has been repeatedly extended and now runs until 31 December 2026.
• Article 199b (Quick Reaction Mechanism – QRM): Allows rapid, temporary use of reverse charge in cases of “sudden and massive fraud.” Strict conditions apply; no Member State has used it to date. Also extended until 31 December 2026.

4. Effectiveness

Evidence from the European Commission’s 2018 report and academic studies shows that the sector‑based reverse charge mechanism has:

• Significantly reduced MTIC fraud in targeted sectors;
• Increased VAT revenues in several Member States;
• Reduced compliance risks for legitimate businesses by preventing inadvertent involvement in fraud chains;
• Contributed to a more level playing field among market participants.
  Challenges include classification inconsistencies, administrative costs of parallel accounting systems, and fraud displacement to other sectors or jurisdictions (“domino effect”).

5. Limitations and Risks

Despite proven effectiveness, the reverse charge remains a derogation from the standard VAT system. Key concerns include:

• Shifting fraud risks to the retail (last‑mile) level;
• Potential relocation of fraud to untargeted sectors;
• Increased accounting and compliance burdens;
• Limited applicability in the face of increasingly digital trade and complex cross‑border networks.

6. Future Outlook Beyond 2026

As the current legal basis expires on 31 December 2026, the EU faces decisions on whether to extend, amend, or replace the reverse charge mechanisms. Several strategic considerations are underway:

Digital Enforcement Tools

Digital reporting requirements (DRRs), real‑time data exchange, and the VAT in the Digital Age (ViDA) package already demonstrate strong results, generating an estimated €19–28 billion in additional VAT revenue between 2014 and 2019. Member States are expected to expand these tools further.

Alternative Structural Reforms

Past EU proposals to eliminate the VAT exemption for intra‑Community supplies—via origin‑based or destination‑based systems—failed due to political, administrative, and trust barriers among Member States. The “definitive VAT system” proposal was withdrawn in 2025.

Enhanced Cooperation

The Commission has proposed strengthening cooperation among Eurofisc, EPPO and OLAF to improve the speed and completeness of VAT information exchange, addressing cross‑border vulnerabilities in MTIC fraud.

7. European Parliament Position

The Parliament supports extending Articles 199a and 199b but has requested a comprehensive assessment before any further renewal. Policymakers must balance the demonstrated effectiveness of the reverse charge with systemic risks, administrative costs, and emerging digital enforcement alternatives.